Delaware Business Litigation Report

Delaware Supreme Court Affirms CCLD Ruling Relying on Expert’s “Dual Hypothetical World” Damages Model for Measuring Business-Interruption Loss

XL Ins. Am., Inc., et al. v. Noranda Aluminum Holding Corp., No. 444, 2019 (Del. Oct. 2, 2020)
An aluminum manufacturer (the “Insured”) decided not to rebuild and resume operations at its facility following two operation-disabling accidents. The Insured made a claim pursuant to its “all risks” property-insurance policy (the “Policy”) to recoup certain amounts including business-interruption losses. The insurers (the “Insurers”) and the Insured each hired expert forensic accountants who, relying on different damages models, rendered widely divergent calculations of the Insured’s loss. Following a seven day trial in Superior Court wherein both parties’ experts presented their methodologies for calculating the business-interruption losses, the jury found in favor of the Insured.

The Insurers appealed, contending that the Insured’s expert employed an inappropriate model contrary to the terms of the Policy to calculate the Insured’s business-interruption loss. The model at issue relied on a comparison between a hypothetical world in which the accidents had not occurred and a hypothetical world in which the insured made repairs after the accidents occurred (the “Dual Hypothetical World Model”). The Insurers argued that the application of this Dual Hypothetical World Model resulted in an inflated calculation of the business-interruption loss and that the appropriate comparison was between the hypothetical world where the accident had not occurred and the real world where the facility was not rebuilt.

The Court, reviewing the Superior Court’s interpretation of the Policy de novo, noted that while the Policy did not provide explicit guidance, and the Insured provided no legal authority regarding the appropriate comparison for calculating a business-interruption loss when an insured ultimately decides not to repair and resume operations; business interruption insurance, by necessity, involves claims for lost earnings based on things that have not happened. Therefore, the Court determined that the Dual Hypothetical World Model was not contrary to the Policy, affirming the Superior Court’s ruling.

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